Our benchmarking is based primarily on data submitted by UK law firms with financial years ending in the first half of 2022 and provides insight into how firms performed as we entered the ‘post-pandemic’ period.
We explore how financial results compared with their expectations, what happened in the ‘people space’ and which areas of the business firms are focusing on now and in the future.
Revenue and business confidence
Overall, most firms reported a pleasing 2021/22 year, with over half of participants stating their results exceeded expectations and only a tenth considering performance to be slightly below expectations. Post-pandemic demand for legal services was high.
Aggregate revenue growth across all firms was 12% - this is broadly double the increase that we saw in our 2021 benchmarking.
It is the Regional firms who led the way this year. City firm participants reported an 11.4% average increase in revenues, with Regional firms coming in at an impressive 14.1%.
With over a third of City firms reporting growth in excess of 10% and a half of Regional firms doing the same, it is also encouraging to see that the proportion of firms with shrinking revenues fell to just
1 in 10 – the lowest we have seen in recent years.
12%
Average revenue growth overall
11%
City
firms
14%
Regional firms
10%
Firms with fall in revenue
Firms with increase in revenue <10%
46%
Firms with increase in revenue >10%
44%
From your recent recruitment hiring experience, what do you understand to be the main drivers which attact and retain talented personnel?
Did revenue growth translate into profit growth?
Stronger demand, coupled with efficiency and cost cutting measures implemented throughout the pandemic period, has boosted year end profit pools for many. But as the sector got back to 'business as usual', some firms, mostly Regional, found it harder to keep a lid on costs this year.
Profitability
23%
Average increase
24%
City firms increase
22%
Regional firms increase
Professional indemnity insurance premium
Year
City firms
Regional firms
2022
£738, 728
£313,845
2021
£640,759
£299,986
Mean profit per equity partner (PEP)
32%
Firms with fall in PEP
Firms with increase in PEP >10%
36%
Firms with increase in PEP <10%
32%
Changes in profit per equity partner (PEP)
50%
29%
21%
City firms
Regional firms
With solid demand for legal services this year, it is no surprise to see headcount continuing to increase. A 4.2% increase in headcount across all participating firms, coupled with average salary increases of around 5%, resulted in a near 10% increase in people costs. City firm participants experienced less salary pressure than their Regional counterparts.
People
4.9%
Increase in average staff cost per head
4.3%
City firms
5.8%
Regional firms
4.3%
8.6%
Increase in personnel costs
City firms
Regional firms
5.8%
11.1%
Average employment cost per head
City firms
£75,835
£72,685
2022
2021
£41,128
2022
£38,880
2021
Regional firms
Staff costs as a percentage of fee income
36.4%
2022
37.0%
2021
City firms
45.0%
2022
45.6%
2021
Regional firms
Baseline
salary
70%
Flexible / agile working policy
48%
38%
Firm culture
and values
33%
Firm brand and reputation
Last year we reported that just over two-thirds of firms planned to focus on improving lock-up and reducing their credit risk. They succeeded, with Regional firms reducing overall lock-up by seven days and City firms by one day.
Working capital - lock-up
68
Average lock-up days at year end
Regional firms
Looking forward, a negative outlook for the UK economy means management teams are even more concerned about credit risk this year. The proportion of firms planning to focus on improving lock-up in the coming 12-18 months has now risen to almost 80% of respondents.
62
130
Revenue
Profitability
People
Working capital
Working practices
Future focus
Change in revenue by overall population
Growth
Does this mean firms are positive about the future?
Perhaps… With inflation running at levels not experienced for many years, the impact of the conflict in Ukraine and volatility in UK government, not a single participant was positive about the outlook for the UK economy.
However, when considering the outlook closer to home – the UK legal sector as a whole and for their respective firm – participants were more encouraged, but confidence is significantly down compared to when we asked this question a year ago.
Looking ahead
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This year, just over two-thirds of participating firms grew their profit pools (77% of City and 61% of Regional firms).
City firms led the way, with greater percentage increases in aggregate profit pools and, more notably, in profit per equity partner (PEP) metrics.
Despite increased revenues, almost 40% of firms struggled to match last year’s profit levels as post-pandemic costs such as travel, business development and recruitment re-emerged.
Profit
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Although salary inflation was rising, the effect is perhaps not fully seen in this year’s results – the average increase per head being around 5%.
For many firms, their 2021 results also included exceptional costs – redundancy costs for some and additional ‘pandemic thank you’ bonuses and rewards for others. Both reduce the impact of year on year inflation here.
At the time of our data collection in summer/autumn 2022, the pressure of inflation was clear – over half of respondents were anticipating remuneration increases in excess of 5%.
Increase
To deal with increased demand, both City and Regional firms grew headcount by just over 4%.
In terms of the ‘people mix’, Regional firms added just over three fee earner heads for every new support staff member.
In City firms, the proportion was much closer at around 1.5 fee earner hires per support staff hire.
Notably, there appears to be little activity in terms of growing partner numbers in the Regions this year.
Demand
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64
59
123
39
105
144
City firms
38
105
143
2021
2022
2021
2022
WIP days
Debtor days
WIP days
Debtor days
One thing is sure – the pandemic changed the workplace in many ways and remote / agile working became a big feature for almost all firms. Moving on a year, has anything changed?
Working practices
Proportion of firms who consider remote working has a negative impact on supervision of team members
65%
Temporary
issue
50%
15%
Long-term
issue
Proportion of firms who consider remote working has a negative impact on collaboration and teamwork
60%
45%
Temporary
issue
15%
Long-term
issue
Proportion of firms who consider remote working has no impact on connection with their clients
60%
Proportion of firms who have had a recent visit from the SRA (or have one confirmed)
1/3
Does your firm offer 100% remote working?
73%
No
28%
Yes
If no, do you plan to do so in the future?
53%
No
18%
Yes, for selected members of staff
This year, just over a half of respondents reported that their teams are working away from the office more than 50% of the time and lawyers working in City firms are the ones most likely to be working remotely. Around 30% of Regional firm participants reported their people only spending a day a week out of the office.
Greatly exceeded our expectations
19%
37%
Slightly exceeded expectations
33%
Were as expected
How did your results compare with your expectations?
People matters continue to top the list of priority risks for most firms, with training and development coming into greater focus this year. Firms remain relatively unconcerned about the availability of funding, although a greater proportion deem it a higher priority than this time last year.
Future focus
In terms of firms’ immediate focus, managing credit risk continues to take a lead but this year there is a notable increase in the number of firms working on improving their environmental sustainability impact – from around half of participants last year to nearly 70% this year.
Proportion of firms who think lawyers are good at scoping and pricing work
15%
Proportion of firms who think price competition in the legal sector will increase significantly
85%
Proportion of firms who think there will be significant consolidation in the UK legal market within the next five years
55%
40%
City firms
70%
Regional firms
Proportion of firms who think attracting external investment (outside of partner capital) will be key to future law firm success
23%
15%
City firms
30%
Regional firms
Proportion of firms who think the partnership model will remain fit for purpose for the majority of firms
80%
90%
City firms
70%
Regional firms
Proportion of firms who think high inflation will continue over the mid-term (3-5 years)
50%
55%
City firms
45%
Regional firms
12%
Were slightly below expectations
Firms with fall in PEP
Firms with increase in PEP >10%
Firms with increase in PEP <10%
City firms
Regional firms
2022
£274,040
£135,757
2021
£258,713
£125,873
Fees per fee-earner (including partners)
77%
City
61%
Regional
Firms with increase in profit pool
23%
City
39%
Regional
Firms with decrease in profit pool
Changes in profit pool
1.5%
City
0.4%
Regional
All partners
5.5%
City
6.3%
Regional
Professional staff - non partners
Increase in headcount
3.7%
City
2.1%
Regional
Support staff
4.2%
City
4.2%
Regional
Total headcount
4.9%
9.6%
All firms
% Increase
+ 15.3%
+ 4.6%
% Increase
+ 5.9%
+ 7.9%
Year
Total personnel costs
Average cost per head
Proportion of firms considering salary increases in excess of 7.5% for the coming 2022/23 year:
45%
City firms
26%
Regional firms
36%
All firms
7.5%
Ross Prince
Partner
Hear from Ross Prince on the key findings.
In conjunction with the ILFM